After Friday’s slump, the greenback was moderately bid against its risk counterparts overnight in what could be seen as a healthy period of consolidation ahead of Wednesday’s German Constitutional Court ESM ruling, and Thursday’s FOMC policy decision. The Aussie dollar took a leg-down in yesterday’s domestic session after China’s trade data, and continued on a slow grind lower overnight before bottoming out at 103.32 US cents. The Euro was lower against its major counterparts, led by a fall in the EURUSD pair which eased to the downside of $US1.28 before finding support just above $US1.2750.

It’s clear there’s a reluctance to carry risk assets higher given much of the positivity surrounding a favorable German court ruling and Fed’s QE3 is already priced in. It is also clear Mario Draghi’s grand rescue efforts unveiled last week could all be in vein should the German Constitutional Court rule the European Stability Mechanism to be outside the boundaries of German law. The ruling which is set to take place this Wednesday, may be the final hurdle in the ESM’s troubled inception, which is designed to serve as a 700 billion euro back-stop for European countries in need of financial assistance. If the court rules the plaintiff’s case untenable, this will then allow German President Joachim Gauck to sign the European Stability Mechanism into law, thus eliminating a critical hurdle, but if the court decides the plaintiff does indeed have a case, this will see temporary injunctions effectively veto the bailout fund at its birth, in-turn, triggering a fresh wave of negativity surrounding leaders ability to contain the crisis. Although a growing number of pundits believe the court will eventually rule in favour of the ESM, any conditions, limitations, or legal amendments may also pose considerable short-term risks to sentiment, given it is likely to see further delays before being ratified. Behind the case is thousands of German citizens, politicians, and the Die Linke or ‘left party’ in the German Bundestag who believe the ESM is unconstitutional given its places public finances at the mercy of other European countries at risk of a hard default and/or exit from the union. Germany is the largest contributor of the fund with a total stake of 27.14 percent with France representing 20.38 percent and Italy 17.91 percent.

Overnight there were reports of further possible delays after German politician Peter Gauweiler launched another offensive over the European Central Banks potentially unconditional use of the fund in its bond buying operations. While questioning the constitutional viability of the fund, Gauweiler stated the ESM “should only come into force when the ECB has taken back its self-awarded power as a hyper rescue-shield." While the court may rule against the injunction from a constitutional perspective, it is also possible the court may further delay its ruling pending further consideration to Gauweiler’s latest anti-ESM initiative.

In the absence of major market move themes in the local session, we anticipate regional equity performance to remain the key barometer for risk currencies, before we’re once again at the mercy of European markets with the long-awaited ESM ruling to dominate the proceedings.

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